New York Misallocated Costs to Establishment Grants for a Health Insurance Marketplace

The New York State Department of Health (State agency) did not always follow Federal requirements in allocating costs to its establishment grants for implementing a health insurance marketplace. Specifically, the State agency:

• allocated $93.4 million from August 2011 through March 2014 using a cost allocation methodology that included an overstated estimate of the population that would use the marketplace to enroll in a health insurance plan,
• allocated $49.5 million to the establishment grants from April 2014 through December 2014 that should have been allocated to Medicaid, and
• allocated $5.8 million of in-person enrollment assistance costs to the establishment grants that should have been allocated to Medicaid.

The State agency misallocated these costs because it did not have adequate internal controls to ensure that it properly allocated costs. Specifically, the State agency did not have written policies that explained how to develop a Cost Allocation Plan (CAP) based on relative benefits received; explained the necessity to use updated, better data when available; or explained how to perform the allocations. In addition, the State agency claimed unallowable expenses totaling $1 million related to obligations made on an establishment grant whose funding period had ended. The State agency claimed unallowable expenses because it misinterpreted guidance regarding the charging of these costs, and it did not adhere to its procedures to confirm that the charges were incurred during the grant's funding period.

We recommended that the State agency (1) amend its CAP for the period August 2011 through March 2014 and either refund $93.4 million to CMS that was allocated to the establishment grants using a methodology that included a material defect or work with CMS to determine the appropriate allocation to the establishment grants; (2) refund to CMS $55.3 million or work with CMS to resolve the amounts misallocated to the establishment grants; and (3) refund to CMS $1 million for costs that were incurred after the funding period had ended on an establishment grant. We also made procedural recommendations related to the State agency's cost allocation methodology.

In written comments on our draft report, the State agency disagreed with our recommendations. After reviewing the State agency's comments, we maintain that our findings and recommendations are valid.